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Houston..we have a problem....

7,317,444 Views | 28750 Replies | Last: 2 days ago by Bibendum 86
Kenneth_2003
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Combine that as ever increasing amounts were paid for what turns out to be Tier II and Tier III acreage by companies experiencing FOMO.

You just can't drill your way out of shale declines, especially in falling prices when your best acreage is already in decline.
Gordo14
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I think there's 3 buckets of problems. Companies who paid way too much for their acreage - not all of them, well spacing/parent-child issues being very challenging and are tied to $60+MM of capital when they go wrong, and all of your revenue from your wells is immediately invested into your next wells. The second commodity prices crash all of your profit from all of your developments gets wiped out for years. Even though those single wells made money, all of that money is now in a project losing money. This price crash is killing some companies and setting others back 4 years basically.
Cyp0111
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Drillcos can work but the capital provider better really know what they're doing and make sure tight handle on the selection of wells (do not prove up tier 3 rock for producer) costs associated (AFEs) and make sure you can hedge effectively.

With that you can win, however, seen some really bad results from Oklahoma but again, trash wells.
Cyp0111
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Exactly. When you require consistent re-investment to manage corporate declines and fixed debt obligations you're setting yourself up for a really bump ride that has little flexibility if prices correct.

For big guys they can adapt and use shale as truly a short cycle investment as a component of a larger portfolio, however, the smaller guys are really impacted by the capital intensity and price risk at the front of the curve
dragmagpuff
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Cyp0111 said:

Drillcos can work but the capital provider better really know what they're doing and make sure tight handle on the selection of wells (do not prove up tier 3 rock for producer) costs associated (AFEs) and make sure you can hedge effectively.

With that you can win, however, seen some really bad results from Oklahoma but again, trash wells.
I saw one idiotic drillco where the capital provider agreed to pay for 90% of the CAPEX for an 85% WI. The wells were in goat pasture.

The capital provider's projected ROI was 2%. The operator's ROI was something like 24%.

This was the same PE group that told me a unrisked 11% IRR for a single well was good, so who knows what they were smoking.
dragmagpuff
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I have seen multiple banks that were on the front lines of the shale boom are basically deciding to stop providing capital to any new unconventional development, and trying to get out of their current holdings for pennies on the dollar. Even more banks now have blanket Oklahoma bans.
CaptTex
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The production during the entire life of a well doesn't equal the amount of money put into it huh? It almost seems like technology needs to improve in order to get the cost of the well down, so that can justify the current drilling rate and production characteristics of today's wells. In essence, we have to do something otherwise the United States will be "energy independent" in name only, and while I know a large company has a way of looking at things differently, but if the ship isn't tight and making money I don't want to run it. Fracking is an amazing technology, but I have read it is extremely expensive, and a lot of companies are making thin margins providing this service(please correct me if I'm wrong). There has to be a way to get that down, since it is one of the biggest expenses, and the rest of the world doesn't have to contend with that extra expense.
one MEEN Ag
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CaptTex said:

Excuse my ignorance, but are you saying that shale plays are not profitable because of the depth and length of horizontal legs that have to be drilled/completed or is this just a case of over promising and under delivering on particular assets? And if the trend is throwing up huge numbers to attract financing, while actually having to take money from peter(the next well) to pay paul(the previous well), at what point will this game plan no longer work because money is going to catch on? If that were to happen, fewer wells might be drilled based on actual projections, and while those fewer wells do produce what they are supposed to to financially make sense, shale in and of itself wont be as attractive no? I know, lots of questions but it is rather eye opening watching yall talk on here.
Its financial tomfoolery on top of shale being a fundamentally different type of reservoir. A traditional oil field has oil in thick layers, just waiting to be extracted. Carbon based life forms (mostly plankton like) breakdown under heat/pressure. As more seafloor is generated over eons, the lighter hydrocarbon oils migrate upwards and collect under impermeable layers of rock. So now oil companies drag out huge lumbering drilling rigs and production platforms to extract oil from underneath the impermeable rock for decades from a field. The average offshore platform produces just shy of 10,000 barrels a day for like 20 years. And thats the average, not the median. There are some huge platforms that can do 150,000 barrels a day. Exploiting those resources takes 4-6 years of planning, construction and can easily reach into the billions to produce and run the newest biggest rigs. So long lead times, huge capex, but super steady reservoir to drink from for decades.

Shale on the other hand, couldn't be more different. It is not exploiting thick layers of oil hiding under impermeable rock layers, it is squeezing blood from a stone within (relatively) impermeable rock. Shale doesn't produce much oil/gas on its own. Its got a super tight rock structure that doesn't allow for lots of migration of oil/gas to the wellbore. Thats where fracking comes in. You drill those super long horizontal wells, pump water downhole to induce fractures into the stone, through some sand downhole to keep those fractures open, and now there is an easy path for oil to reach back to the wellbore. The only problem is, there isn't much oil hiding out in the pores of that shale rock. So shale wells start off with relatively large production numbers, but taper off super quick. Think a 100 to a 1000 barrels a day having a half life of nine months. So relatively low lead times, low capex, but no real long production tails. The wells quickly die off compared to offshore. To make up for this, oil production companies keep drilling new wells. You don't have to go far, the shale is relatively impermeable. Just get outside of your previously fractured areas and drill/frack again. (I'm avoiding a whole part of this about parent child wells and frack spacing, another day)



Go back in time to 2010-2014. Extracting shale oil becomes a huge hit. Oil is between 70-80 dollars a barrel and now Texas has the ability to contribute significant oil on the global stage at relatively low prices. PE groups form and they start extracting. Texas is generating money out the ying-yang and the global oil demand doesn't really blink at it.

Then a couple things start to happen. First is that traditional reservoir decline analysis won't work for this type of reservoir. The models are overestimating whats left in the ground that can be produced. So new models are created to account for this 'tight' shale formation model. But data that companies are giving investors just isn't lining up to production. Too many fudge factors. Too new. But people are making money. So now there's a pricing surge for land as investors swarm in, raise capital for equity stakes, or like a lot of companies, issue debt on a 7 year timeline.

2014 you start to see some structural changes in oil prices. US land production is now so great that its weighing internationally on the price of oil. And by 2015 oil prices go down into the 40s-50s. Operators are starting to ask for more/better fracking technology to boost their outputs. Its becoming apparent that the production from the first round of wells doesn't cover the cost to drill. But, companies can still get access to debt from PE equity markets and they've got the rest of their field to drill. So off to another round of capex spending and more rigs. You've now got 'dumb' money flowing in with PE houses eager to take their cut, and oil companies needing more cash with problems to deal with later.

Multiply this by a whole field and you get the current predicament. Just look at how steep the aggregate production curves of US land is. Its like a kids bouncy house. If money doesn't keep pouring in to drill, the whole thing immediately deflates.

So now, in 2020, everyone knows the marketing slide decks are chock full of lies. The PE market dries up. Those 7 year debts issued back in 2014? They're coming due and the companies do not have the money to pay it. Their options are either A) issue a second layer of debt but there is not capital market who is willing to fund throwing good money after bad anymore. B) Declare bankruptcy today. C) Don't drill, just keep producing your current wells. But your revenue supply will start drying up pretty soon. Potentially declare bankruptcy tomorrow.

Coronavirus is just an acceleration of what was going to happen eventually. OPEC+ can't stand america undercutting everyone else on the world stage. Thats why theres been a price war before coronavirus to wipe out the low cost oil in the US, and scare investors away from the industry for good.

US shale will be a strategic asset in the future. To be used as a peaking facility for excess demand. I don't think we will see the return of US land to its peak.


The biggest winners in all of this, if there are any, are those companies who had the land the cheapest before the boom took off. Anyone who paid top dollar for the acerage is basically toast.

We still haven't even gotten to oil/gas ratios shifting to more gas over the life of the shale well, and how lightweight the oil is that refineries aren't set up to take it, they need to blend it with heavy stuff. There's also long term electricity price consequences because fracking makes natural gas stupid cheap. Environmentalist cheer the destruction of oil, but will feel the pain on their electricity bills eventually plus deal with rolling brownouts.

I hope this helps. If anyone finds anything I've said to be in error, please feel free to add on.
Cyp0111
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As they should the RBL will still be around but imagine LTV will be 50% max and advances will only be for seasoned production. Too many banks financed what accounted for essentially 100% of drilling capital with equity spent on worthless acreage.

Banks taking 50-70% haircuts in RBLs which previously had historical LGDs of 5% will shrink the space. Not to mention the paper has proven to be misspriced to risk
Joseph Parrish
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If companies are able to improve their time to market (which has a lot of value in itself), then you can hide the well decline by making the field-wide production ramp up. As it was mentioned earlier, the big problem isn't usually the early production. I've had a lot of success doing this before, but we didn't over inflate the production forecasts.
CaptTex
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Very informative and thanks for taking the time to type all of that out! And that graph is kind of alarming, exactly as you said production rockets but quickly falls off. So if shale is not this amazing thing we can do all of the time, but only utilize it when prices allow that kind of production taper to exist, how does the oil industry prosper?
Gordo14
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CaptTex said:

The production during the entire life of a well doesn't equal the amount of money put into it huh? It almost seems like technology needs to improve in order to get the cost of the well down, so that can justify the current drilling rate and production characteristics of today's wells. In essence, we have to do something otherwise the United States will be "energy independent" in name only, and while I know a large company has a way of looking at things differently, but if the ship isn't tight and making money I don't want to run it. Fracking is an amazing technology, but I have read it is extremely expensive, and a lot of companies are making thin margins providing this service(please correct me if I'm wrong). There has to be a way to get that down, since it is one of the biggest expenses, and the rest of the world doesn't have to contend with that extra expense.


Offshore is a whole lot more expensive than shale is. The platform alone can basically cost as much as our entire company's capital budget last year. It isn't
about cost, it's about what you get for a given a cost. Ultimately costs aren't as important as oil production for economics. Cost savings are always nice, and maybe get you to eek out an extra well or two at the end of the year, but production is what makes the business work. You can drill extremely profitable wells even in current commodity price environments with the right production profile - **** gas is actually worth something in the Permian for the first time in 2 years. But it's very easy to turn profitable wells into money losers. In my experience in both conventional and unconventional, when the companies I worked at prioritized cost savings on completions, we have lost far more money due to lost production. Beyond the completion itself, there aren't many dials to turn. The majority of our non-fixed capital costs are out of our control - they go up and down with demand for those services.

Again, I've drilled many wells that in a given commodity/capex environment made **** loads of money in shale. I've had many wells payout in less than 8 months. That's not the problem. It's recovering from ****ty well spacing sinking $100MM of capital and commodity crashes that really hurt because there's nothing left but short cycle, high decline assets. That still doesn't mean there aren't opportunities, I mean we drilled 2 wells 1st prod in May that economically are going to be some of the better wells we've drilled in the past year - easily sub 1 year payout. They make a lot of gas and they don't have spacing/parent well issues. But on a portfolio basis, we're stuck watching our production decline with not enough cashflow to drill beyond obligation drilling.

If you can't make money in shale ever, as some people on this board like to pretend, EOG would not exist... Let alone be as large as they are. That company was literally built on shale oil development, how are they not bankrupt? Because like all oil and gas wells, you can make them work in the right capex-commodity price environment.

Ultimately, shale going forward needs to be a piece of a more diverse portfolio of oil and gas assets. It's still valuable, it's still possible to make good money and fast, but you can't rely on it at all times as the sole investment opportunity in your portfolio. That's why, unfortunately, the independent should be swallowed up by the integrated companies... As sad as I find that personally.
Sporty Spice
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Gordo14 said:

I think there's 3 buckets of problems. Companies who paid way too much for their acreage - not all of them, well spacing/parent-child issues being very challenging and are tied to $60+MM of capital when they go wrong, and all of your revenue from your wells is immediately invested into your next wells. The second commodity prices crash all of your profit from all of your developments gets wiped out for years. Even though those single wells made money, all of that money is now in a project losing money. This price crash is killing some companies and setting others back 4 years basically.


I think you're spot on, especially on your last point. Not enough discipline to hold off/slow drilling in a lower commodity price environment where your money made is now being reinvested in bad wells. Plus, there needs to be better debt discipline. Too many debtors taking equity-level risk. And many PE shops are the ones pushing this verses coughing up the $$ themselves.
Cyp0111
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Agree 100% with all of above. Well said.
one MEEN Ag
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Gordo14 said:

If you can't make money in shale ever, as some people on this board like to pretend, EOG would not exist... Let alone be as large as they are. That company was literally built on shale oil development, how are they not bankrupt? Because like all oil and gas wells, you can make them work in the right capex-commodity price environment.

Ultimately, shale going forward needs to be a piece of a more diverse portfolio of oil and gas assets. It's still valuable, it's still possible to make good money and fast, but you can't rely on it at all times as the sole investment opportunity in your portfolio. That's why, unfortunately, the independent should be swallowed up by the integrated companies... As sad as I find that personally.
EOG still exists because they fit all of the three characteristics you describe oil companies need to survive moving forward. They have the largest, highest quality acreage among all the independents portfolios at the cheapest prices. They are also successfully vertically integrated and show great capital discipline.

(Not trying to pick a bone with you. Great, informative post.)
Cyp0111
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Yep, decent asset diversification, low entry cost and scale. Something most independents don't have. I also think Eog has largely been organic vs acquisition based
Bob Knights Paper Hands
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Gordo14 said:

I think there's 3 buckets of problems. Companies who paid way too much for their acreage - not all of them, well spacing/parent-child issues being very challenging and are tied to $60+MM of capital when they go wrong, and all of your revenue from your wells is immediately invested into your next wells.

These three plus the squeeze caused by oversaturation in the Permian maxing infrastructure, as well as higher gas and water production than many predicted increasing operating costs. Lump on environmental concerns or penalties for flaring and light that powder keg on fire with a sudden drop in global demand. It's still a world class play but it's got a lot of warts.
fta09
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Great informative post and I love the bouncy house analogy. We had one setup in the backyard for the kids earlier this summer and I said the same thing to my wife, who is a nurse, to explain the situation we are in.
topher06
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Does anyone know whether the gas guys in Appalachia (EQT, Cabot, Range) will be constrained against collapsing the recovering natural gas market or are they going to just try to do the same thing the Permian/Delaware guys did? Hopefully the banks have learned at least some lesson and force those guys to develop at a responsible pace.
Cyp0111
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You would hope they would use improvements to fortify what I consider weak balance sheets. However, been in this game long enough to know that when spot prices result in IRR of x they gonna drill regardless of impact 6 months down the road. Short cycle economics for the win.
topher06
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Cyp0111 said:

You would hope they would use improvements to fortify what I consider weak balance sheets. However, been in this game long enough to know that when spot prices result in IRR of x they gonna drill regardless of impact 6 months down the road. Short cycle economics for the win.
Yeah, there are unfortunately too many executives that still consider increased production as the gold standard of a thriving company. I suspect it will need to be the banks and debt markets that force the companies to drill at a sustainable pace rather than attempt the "expanding spiral" method that has sunk the Permian/Delaware.

Some development in the core acreage is rational, and probably necessary. However, I really hope the gas guys also prioritize paying their shareholders back while eliminating risk for the debtholders. The oil side (recognizing that some companies were responsible, offset by the Matadors of the world paying $100k/acre) has really left the industry with a black eye this time and that reputation is going to take a long time to repair.
Cyp0111
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Big problem w gas guys are the MVCs
ThreeFive
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Looks like Magnolia is going to be taking over as operator from EnerVest. They have several positions posted on LinkedIn right now for those of you looking.
Beckdiesel03
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Mr.Diesel got an email from Magnolia that he had been selected for an interview "in the next couple of weeks" I could really handle him going back to work after 6 months of not being able to find much of anything.
KaneIsAble
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Didn't Magnolia take over EV a couple of years ago? I know they did in the Chalk but don't know their operations outside of that area.
Boat Shoes
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KaneIsAble said:

Didn't Magnolia take over EV a couple of years ago? I know they did in the Chalk but don't know their operations outside of that area.


That was my thought as well?
Bismarck
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My memory is that Magnolia bought the assets but Enervest has continued to contract operate them.
ThreeFive
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Correct. They had a 3 year contract with EnerVest to operate the wells. They gave notice that they will not renew the contract and will take over as operator in August.

They'll probably try to bring on a lot of folks that are already working the assets at EnerVest, but it's worth keeping your eye out if you're looking.
ThreeFive
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What does Mr. Diesel do? I think I remember a past post that he worked in the field.
Beckdiesel03
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Yes he was a Landman /crew chief over seeing the field office in the EFS.
Bismarck
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That makes sense. They've had time to learn the assets at this point.
Dreigh
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Y'all seen this BS about a 2,000 ft. setback for new wells in CO?

LINK

Had someone tell me recently to get ready for the regulations that are being put in place in CO to "spread like wildfire" (their words, not mine /eyeroll) in other states, especially if JB & KH get elected. Hard for me to believe that TX would behave anything like CO when it comes to oil and gas regulations...
Bob Knights Paper Hands
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I don't see how the Fed could push other states to follow those kind of regulations. However they will gear the EPA back up and try to weaponize them to curtail O&G. They might try greenhouse emissions again, might try more restrictions for water production, disposal, or reuse for completions. They'll probably come up with something we haven't heard of. However i wouldn't expect the easements and other state regulations to change much just because California or Colorado does something.
topher06
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Not surprising at all when the democrats in Colorado pushed through 181 In the middle of the night after losing a few months earlier on the setback rule. Colorado will lose oil and gas, but I'm not sure they care.

No way I'm investing in a company operating in the DJ.
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